Causal links between financial development and sectoral carbon emissions in GCC economies

As the Gulf States are the principal producers of fossil fuels, the challenge in this region is twofold: reducing CO 2 emissions while maintaining economic growth. However, no previous empirical investigation has employed different Financial Development indicators simultaneously with six sectoral CO 2 emissions in the GCC region, taking into account the multidimensional nature of the financial development index. To fill this gap, this paper examines the relationship between these financial indicators and six sectoral CO 2 emissions in GCC countries over 1980-2021 using the bootstrap panel Granger causality test [ 38 ]. We find a significant long-run negative relationship between Financial Development and CO 2 emissions. Sectoral analysis reveals that in the UAE, financial markets Granger-cause CO 2 emissions negatively through the Power Industry, indicating successful financing of renewable energy. Conversely, in Oman, Qatar, and Saudi Arabia, financial development indicators exhibit positive causality, suggesting financial expansion still fuels carbon-intensive activities. These findings suggest that policymakers should prioritize financial market development and target specific sectors, particularly the power industry, to maximize the environmental benefits of financial sector expansion environmental benefits. In practical terms, this implies that GCC countries need country-specific strategies: while the UAE should leverage its financial markets to further green the power sector, other Gulf countries need financial reforms redirecting credit from fossil fuels toward sustainable investments.